Its central location, its stable economy and its perfect fiscal environment make Austria an attractive country for international tax planning. For companies, foreign income is not taxed, but foreign losses are deductible. There are 89 tax treaties. There is no inheritance tax, gift tax or wealth tax, no thin-cap rules and no withholding tax on outgoing interest. Research and development is subsidised as well as deductible.
Individuals are taxed on worldwide income, with some exceptions. The top rate is 50%, but dividends, interest and capital gains on shares are taxed at 25%. There is a favourable regime for international sportsmen.
Corporate groups enjoy on attractive regime, including 50% amortisation of acquired shares over 15 years. Group profits and losses are aggregated. There is also a holding company regime for portfolio investment (less than 10%) and, more favourably, for direct investment (10% or more). There is now no withholding tax on dividends to EU shareholders. Austria taxes capital gains, but there are exceptions applicable to share sales or exchanges.
The private foundation offers several tax benefits. It is registered, but its detailed regulations are not open to the public. The founder may keep effective control and retain a right of revocation. There is a gift tax of 2.5% on the endowment but no inheritance tax on death of the founder. Payments to resident beneficiaries are taxed at 25%, but those to non-residents suffer less tax. The private foundation has many uses, including the establishment of Sharia-compliant structures.
In 1978, Luxembourg was a ‘first mover’ in the development of Sharia-compliant institutions, and since then the tax authorities and the regulators have issued circulars designed to facilitate compliant transactions. The income tax position was clarified by a circular of January 2010, and the regulatory position was set out in a circular of June 2011. Fundamental to Sharia principles is the prohibition of interest and gambling. Profit from trading is permitted; insurance may not be. A Murabaha is the equivalent of a mortgage. A Musharaka is an investment partnership. A Mudaraba is a partnership in which one partner contributes finances and the other services.
Ijara is a kind of hire-purchase; Sukuk is the ‘Islamic bond’ – a securitisation of permitted income stream. The income tax treatment of a Murabaha spreads out the profit over the payment period and treats the two sales involved as a single transaction. The remuneration paid to Sukuk bondholders is treated as interest, free of withholding tax. The regulatory regime in Luxembourg is sympathetic to the issue of Sukuk bonds. Several securitisation vehicles are available, both regulated and unregulated. The Sharia-compliant industry is presently small, but poised to grow.
Luxembourg is the largest investment domicile in Europe. The US is the largest in the world. A fund is a collective investment scheme with a professional manager, with a diversified portfolio and enjoying the economies of scale. It is not, however, always the appropriate vehicle. In choosing a location, there are several non-tax considerations – licensing, regulations, minimum investment requirements, the AIFM Directive. There is a variety of vehicles, some more heavily regulated than others, some closed- and others open-ended. Funds generally receive favourable tax treatment onshore, but offshore jurisdictions still have an important role to pay. Luxembourg and Ireland offers a virtually zero-tax regime. The UK and some other countries offer exemption from capital gains tax. Recent amendment to the OECD commentary indicates that funds qualify for treaty benefits. The proposed EU Directive imposing a financial transactions tax may not get the approval of all the member States. The wishes and prejudices of the investors may influence the choice of jurisdiction. A master-feeder structure can cater for different kinds of investor.
There are also tax considerations at the investment level: a ‘stepping stone’ blocker may be requisite. The impact of FATCA will need to be taken into consideration, but the guidance presently available is limited. In a Luxembourg FCP real estate fund, a SOPARFI may serve as a blocker. Fund managers have become accustomed to very low tax rates. This is becoming ever more difficult to achieve. Both management and control and permanent establishment considerations are important.
China’s tax system concentrates on companies. Individuals are liable to tax on worldwide income at rates up to 45%, but records and documents are often few. This can be difficult for US green card holders who move to China but are still liable to US tax.
Foreign structures are often formed to keep revenue outside China and beyond the scrutiny of the local government. However, foreign structures have additional benefits: transfer of shares is easier with a foreign company, and it is easier to raise capital for a foreign company. There is a great pressure to get money outside the country. The principal reason is a desire to diversify investment outside China. There is great concern about a China bubble and about future government regulatory changes. An offshore company can be used for the purpose of making the investments abroad. Cayman and BVI holding companies are common. Hong Kong companies are generally used for inward investment: they can take advantage of the favourable tax treaty with China. The US offers a green card to investors who invest as little as $500,000 in a qualifying investment. This enables Chinese to relocate their families to the US, for the principal purpose of getting a US education for their children, and to obtain flexibility about their future.
In India, tax rates for individuals do not exceed 30%. Many Indians who became citizens have now returned to India. There is no gift or estate tax in India, but local customs and religions can dictate forced heirship. The Hindu undivided family is similar to a discretionary trust under the control of the senior family member. Other traditions affect Muslims, and Parsees.
Trusts planning often breaks down into two categories – Indian trusts for local assets, and non-Indian trusts for assets outside India. This is fertile ground for trust and estate planners.
Longevity has increased – and so has the cost: a pensioner may have to support parents, children and grandchildren, and the capital cast of providing a pension has increased 250% over 40 years.
The UK-registered pension scheme is arguably the best on the planet – and not just for UK-based workers. For UK taxpayers, there is tax relief on contributions of up to £50,000, but there is a cap of £1.8m (to be reduced to £1.5m next year), though with transitional protection for prior higher funds. Tax-free accumulation can produce a very large growth. SIPPS are for one person, SSAS for more than one. They are useful to UK residents and also to non-residents who have UK source income. Gearing, joint investment, dealings with connected parties, loans to associated companies – these are all permitted. A pension also offers a degree of protection against creditors and some inheritance tax benefits. A UK pension may be transferred to a QROPS.
The benefits of QROPS vary, depending on the residence of the policyholder, but expert advice is always needed. QNUPS can function on a ”top-up” pension scheme. Contributions attract no tax relief. The proceeds are exempt from inheritance tax. QNUPS are most suitable for high net worth individuals who are non-UK resident but may retain or regain UK domicile, and who wish to park assets in any inheritance-friendly environment without losing access and control.
This is a ‘wrapper’ which allows the insurance company to invest the premium in a separate account, managed by the company or by the policyholder. It offers a beneficial tax treatment in many countries, and the business has grown considerably in the last six or seven years. Luxembourg has attracted a lot of cross-border businesses from other EU countries, especially from Belgium, France, Italy and Germany. Many bank accounts have been restructured as life policies.
A particular feature of Luxembourg, and one which is unique in Europe, is that policyholders have a prior claim to the investment assets of the company – these being held by an independent custodian bank. Private placement insurance can be issued if the premium is at least €2.5 million. If the premium is €5 million, unquoted assets may be held.
Judges in the ECJ – as in other courts – try to be neutral between the tax authorities and taxpayers. Cases often turn on the use of a statute for a purpose for which it was not intended – what is described as ‘abuse of law’. Identifying meaning in European legislation is difficult – so many languages and so many legal traditions being involved. Among the 13 judges hearing a case, total unanimity is often absent, but the basic principles are plain: the law needs to be certain, but the legislator cannot be expected to foresee every circumstance.
The four freedoms are fundamental. Where a taxpayer attempts to move a profit source from one EU country to another, the Court may have to decide whether this is legitimate. One case involved abuse of an export refund entitlement, where the taxpayer artificially created a situation designed to obtain refunds. In Halifax, the Court said that the law must be clear and its consequences foreseeable: the taxpayer is free to choose a route which involves less tax, but not so as to wrongfully take advantage of the rules – i.e. in a way contrary to the purpose of the law. There is an ‘essential aim’ test and ‘sole purpose’ test; both of these have been used in ECJ cases.
In Centros, a Danish couple registered a company in England and sought a licence to operate a branch in Denmark. The purpose was to avoid the Danish minimum capital requirements. This was found to be artificial but not abusive. In the Thin Cap case, interest charges effectively transferred profit from subsidiary to parent, and the UK legislation preventing this required to be justified – which is this case it was not.